Skip navigation


Current DateTime: 03:38:04 22 Nov 2009
LinksList Documentid: 24355697
  • Runway Angels

      The superbowl of fashion shows, models walk down the runway at the 2009 Victoria's Secret Fashion Show.

  • The Richest Members of the US Congress

      Recently, the Center for Responsive Politics found that there are 237 millionaires in the US Congress.

  • 10 Tips to Get Out of Debt

      Renowned financial author Gail Vaz-Oxlade takes a tough-love approach to helping couples in a financial crisis to face reality.

FEATURED QUIZZES


Current DateTime: 03:38:04 22 Nov 2009
LinksList Documentid: 33793611
  • How Much Do You Know About Green?

      Green has become part of our everyday lives. Green is everywhere-- energy, clothing, food, housing, transportation. It's a big business and a global business.

  • The Billionaire BFF's

      Philanthropists. Bridge partners. Hockey players. Which responses are based on facts from Buffett's and Gates' real lives?

  • The Many Myths of Coca-Cola

      Can you tell which statements are true, and which ones are just rumors?


Current DateTime: 03:38:04 22 Nov 2009
LinksList Documentid: 24890560
  • Winterizing Your Portfolio

      If 2009 was the winter of our discontent, will 2010 be a winter wonderland for investors? A lot depends on the recovery—or lack thereof.

  • Investor's Guide to Real Estate

      Some even say the long-awaited recovery is here. Regardless, buyers and sellers alike can profit from our guide.

  • Alternative Investing

      Stocks and bonds? Sure. But it's a big world out there for investors.

powered by digg
For Banks, Wads of Cash and Loads of Trouble
By: Eric Lipton and Andrew Martin, The New York Times | 04 Jul 2009 | 09:04 AM ET
Text Size

H. Averett Walker used hot money to turn Security Bank from a sleepy Southern lender into a regional powerhouse. Darrell D. Pittard used hot money to jump-start his brand-new MagnetBank, allowing it to lend hundreds of millions of dollars even though it did not have a single drive-up window or even a customer with a checking account.

It is a formula being replicated at banks across the United States.

Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate.

But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.

Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.

Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.

So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators.

Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow. But even some industry executives acknowledge that certain banks became too dependent on the deposits, and that this abuse caused banks to fail. The consequences can be seen across the country.

The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.


Current DateTime: 03:38:05 22 Nov 2009
LinksList Documentid: 22528754

The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive.

It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s.

Tools:
Print EmailAdd This share icon
  • digg share

CNBC HIGHLIGHTS

  • Technology can make or break a fortune in the world of alternative energy.
  • Many people are facing the holidays with substantially smaller incomes. Here’s how some are adapting.
  • Jim Cramer
  • Jim Cramer is a proponent of stocks that pay healthy dividends, and here are his top five dividend plays.
  • From salt, to lip balm to envelopes, it turns out that bacon flavoring can sell almost anything.
  • real estate signs
  • The homebuyer's tax credit jacked sales for a while, but 2010 is looking weak. Now what?
  • CNBC’s technology reporter Jim Goldman guides you through the best gadgets to buy this holiday season.
ADD COMMENTS
Remaining characters


Current DateTime: 02:35:20 22 Nov 2009
LinksList Documentid: 29778428

Current DateTime: 02:42:00 22 Nov 2009
LinksList Documentid: 29779196

Current DateTime: 02:35:20 22 Nov 2009
LinksList Documentid: 29779199

Current DateTime: 02:35:20 22 Nov 2009
LinksList Documentid: 29779198
  Data is a real-time snapshot  *Data is delayed at least 15 minutes
Global Business and Financial News, Stock Quotes, and Market Data and Analysis

© 2009 CNBC, Inc.  All Rights Reserved.
A Division of NBC Universal
Thomson ReutersThomson Reuters